Ever get a tenant offering to pay a few months in advance?

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  • Andrea M.
    Real Estate Investor · Hampton, VA · Member since 2012 · 562 posts · 109 votes
    13y

    Yes, for me that has usually happened around income tax time, which I accept and make sure I document it accordingly.

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  • Jon K.
    OP
    Member since 2011 · 798 posts · 216 votes
    13y

    I forgot that it's tax time.

    Is there a downside to accepting rent early? Do they usually keep paying after their first "lump sum" tax refund?

    My prospective tenant is self-employed.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    How long does it take to evict in your state and how much ahead are they willing to pay??

    I have seen this before where they haven't paid the previous landlord and that's the reason they have the money or they come into a big job or small windfall and want to secure a place for awhile. Look at the self-employed income. Does it stay balanced through the year or are certain months slow for that type of profession??

    What reserves do they have in their bank account and how much is going out and in each month?? If the income is even each month and they can pay say 4 months in advance it might be worth the risk. If they can only pay 2 months and the type of job shows slow months ahead and they have little to no reserves I would pass.

    I have done this type of deal before and the extra money upfront is tempting but it's all about the details. If they live 2 months paid up but then do a bunch of damage or have to evict then you would have been better off waiting for a more stable tenant.

    The way a tenants mind works usually is " My credit isn't decent and my job history isn't as stable so here is what I will offer Mr. landlord "

    Instead of 800 a month rent I can pay 2 months and then a little extra security deposit. The landlord with experience sees this and says to take that kind of risk I will need 3 months paid upfront and double the security deposit. Most can't meet that description and then that's when the prospect says you are unreasonable and leaves and I say let them go elsewhere because I know what happens most of the time. Self-employed and contractors etc. and certain types of jobs are very unstable so as a landlord you have to protect yourself. They also typically have bad to marginal credit and no reserves and are hard to collect on with a judgment.

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  • Andrea M.
    Real Estate Investor · Hampton, VA · Member since 2012 · 562 posts · 109 votes
    13y

    My experience, with my tenants they kept paying however, I have had 1 tenant who paid upfront every few (2-3 months) in which I had to evict but that was after about 9 months of tenancy and evictions in my area isn't a long drawn out process if the landlord stay on top of the situation.
    Based on your statement regarding the prospective tenant being self employed, what documents are you requesting as proof of income?

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  • Jon K.
    OP
    Member since 2011 · 798 posts · 216 votes
    13y

    Interesting. That was my first thought: they have bad credit or are trying to cover up for job issues.

    This is a roommate situation. 30 days notice here and they're out.

    I googled their name, and found they were a counselor. The registered address of the counselor's healthcare license is a $500,000 house. The house is in the name of this person and a (likely) spouse's name. It seems like this might be a divorce.

    I wonder if their seemingly home ownership (with a divorce in the picture) might make them less of a risk?

    They probably would be hard to get a judgement against as they're a self-employed counselor.

    I'll have to ask for bank statements.

    They offered 3 months in advance.

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  • Andrea M.
    Real Estate Investor · Hampton, VA · Member since 2012 · 562 posts · 109 votes
    13y

    I would ask about any credit issues, request bank statements and based on how long they have been self employed I would request copies of 2 years of tax returns. It could be a divorce situation or a pending foreclosure/short sale which of course would affect credit. Is credit a deciding factor in your tenant selection or job stability? I would assume you are not running credit?

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    If they are carrying a bunch of debt on credit report or having a divorce bankruptcy could be in their future and it could get messy.

    You need to look at the profile like a potential lender and asses risk and ability to pay. The more problems found the more stringent your demands. If they are offering 3 try to get 5 or 6 upfront. You want to time the upfront payoff in a way that if they stop having money you can get them out quick and it will be a strong rental time of the year so you can land the most tenants and give the least in rent concessions upon releasing. Also you can check with your local county or city eviction court and see what their writ volume and dispossessory looks like month to month. Some months are historically more heavy in volume in others and instead of the Marshall taking 1 week to serve it takes the 4 weeks to get out there and evict the tenant because they are backed up.

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  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    Jon, If it's a roommate situation with 30-day notice, he might just be looking for temporary housing, especially if he's divorcing. He might be offering the 3 months in advance just to make sure he can at least stay that long (like waiting for support hearings or something). Especially in a divorce, the court may freeze accounts or force one party to pay the other a large cash amount, so no matter what his bank statements say now, he may not know if he'll have any money next month, let alone 3 months from now. I'd definitely check his bank statements to make sure he is sound financially before you rent to him, just saying that if it's a divorce, that money could be gone after one court hearing. If he's paying a month's deposit plus 3 months in advance, then maybe just plan on giving notice at the start of his last paid month if you feel he' s too much of a risk then. How does it work, though, if he pays for 3 but wants to leave after 1? Do you have to refund him the 2 months, or is it forfeit? I'd want some sort of clause saying if he leaves early, he's liable for that 3 months unless you (not him) can find another qualified roommate.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    13y

    The other possibility is that they'll be doing something illegal out of the house and want to ensure that you have no reason to come around. I've heard of this with tenants growing pot in the house.

    Not saying that's the case (there are lots of reasons to pay in advance), but just something to keep in mind. Maybe have something in the lease that says you'll stop by once per quarter to replace the air filters or something...

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  • Tamara R.
    Investor · Vienna, VA · Member since 2011 · 158 posts · 45 votes
    13y

    I have had people who want to pay in advance for a discounted rent. However, In my state (Virginia), landlord is required to put any extra rent in an escrow account and you only have access to it once the new month comes around. You might want to check your state's laws. In my situation, it just seems to be too much of a hassle.

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  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    13y

    In the past this has indicated problems as the due date seems a little less important as in sometimes I am early and sometimes I am late. You go late thinking a big chunk will come and then there you are, nothing.

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  • Jennifer Lee
    Real Estate Broker · Gibsonia, PA · Member since 2013 · 828 posts · 260 votes
    13y

    my tenant pays a full year in advance, but only after he has leased with me for 2-3 yrs. he does it to not have to worry about monthly chks etc. he has good credit, job and family.

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Don't forget that the year in which the rent was received to you is the year in which it is taxable. That means if on December 31st you are paid the next full year's rent. It is taxable as that year's income. If it is paid in July, you still recognize that entire first half of the year PLUS the advance rent.

    -Steven

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  • Albert Hasson
    Investor · Paradise Valley, AZ · Member since 2012 · 361 posts · 214 votes
    13y

    Its not always a red flag. I have a professional baseball player here in town for spring training who insisted on paying his entire 6 month lease up front. Guess he didn't want to be bothered with sending a rent check.

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  • Jeff Bridges
    Investor · Hyattsville, MD · Member since 2012 · 822 posts · 441 votes
    13y

    @Brandon Turner posted a good anecdote about this recently: http://www.biggerpockets.com/renewsblog/2013/01/21/rockstar-investing

    Bottom line is this is generally a red flag to be extremely cautious. While there are a few trustworthy people who just want to pay in advance, the more common reason is poor financial management that will come back to bite or they have something to hide. While they are flush with cash during tax time, you have to ensure they can continue paying rent normally the rest of the year. Up to you to determine.

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  • Michael B.
    Apopka, FL · Member since 2012 · 207 posts · 120 votes
    13y

    I had an older gentleman that used to do that.

    He'd pay a year in advance each year. That was because some government program (possibly the Veterans Admin) didn't count prepaid rent as an asset when determining whether he was eligible for services, but cash in a bank account was counted. So he'd pay up a few weeks in advance of their annual audit of his finances to keep himself eligible for whatever he was getting.

    He's also the only tenant I've ever had to die in one of my places. One day his daughter called me because she hadn't heard from him for a few days. I let her in and we found him in bed, dead for a day or so.

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  • Rob K.
    Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    I have a tenant who's wealthy parents pay the rent six months in advance. Every six months, I get a nice check. I'm happy and they're happy.

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    13y

    A family member of mine had an applicant who was a stripper/exoctic dancer who offered to pay 6 months in advance in cash. I'm not sure if it was all in ones. :)

    Anyway, I ran her credit and recommended her app be denied due to an extremely poor credit history and a prior eviction. I can be flexible with poor credit, but a prior eviction is one of my automatic denial criteria. I'm sure the next landlord she applied with took her up on her offer. Six months worth of rent in cash is hard to pass up.

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  • Robert Steele
    Investor · Lucas, TX · Member since 2010 · 620 posts · 352 votes
    13y

    Red flag!

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  • Sabrina Laplante
    Real Estate Investor · Squaw Valley, CA · Member since 2012 · 101 posts · 17 votes
    13y

    As soon as I saw you post, I instantly thought of Brandon Turner and his recent Blog I just read, [http://www.biggerpockets.com/renewsblog/2013/01/21/rockstar-investing/] Check it out :)

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